The central bank cut its cash rate 25 basis points to 4.25 per cent, marking the first back-to-back monthly cuts since April 2009.

If passed along in full by the banks, today’s cut will save the average mortgage holder - with a $300,000, 25-year mortgage - about $47 a month. Retailers had been calling for a rate reduction to help bolster tepid sales heading in the final few weeks of 2011.

The Reserve Bank has given retailers and borrowers something to cheer about. Photo: Peter Braig

‘‘Today’s decision to cut interest rates again will provide Christmas cheer to families and small businesses, that is particularly welcome around Christmas,’’ Treasurer Wayne Swan told reporters.

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Pensioners and others receiving interest payments on their deposits, of course, will be less happy with today's news as their incomes will fall as banks trim rates on savings.

BoQ first to cut

The Bank of Queensland acted within minutes to become the first bank to move, passing on the full 25 basis-point cut to 7.36 per cent for its standard variable mortgage rate. Major rivals said they are reviewing their rates.

BoQ's chief executive Stuart Grimshaw says passing on the full cut was the right thing to do by customers.

Today's rate cut comes a day ahead the release of third-quarter gross domestic figures which are likely to show Australia growing at about a 2.3 per cent annual clip. While that pace is the envy of most rich nations, it masks a widening gap between mining and non-mining regions.

The dollar sank after the rate cut as the Australian currency lost some of its appeal. It lost more than half a US cent to fall below $US1.02 before clawing back some of the loss. Stocks extended their slide for the day to be off 1.2 per cent in late trading.

Shifting stance

Some economists say the central bank has now shifted its stance to focus on bolstering domestic demand as the outlook particularly Europe turns gloomier amid the region's sovereign debt crisis.

"This signals the RBA is now focused on supporting domestic demand, with inflationary pressure under control,'' said Peter Esho, chief market analyst for City Index.

"Clearly, Australian private sector services industries and retail in particular are feeling the pressure and a rate cut comes just in time for Christmas," Mr Esho said. "The cut and tone from the RBA means we might see some downside to GDP and employment numbers when they are released later this week."

Colonial First State Global Asset Management analyst James White, though, said the RBA's decision was unsurprising given the financial market volatility of the past month.

"The decision is no big surprise, neutral was probably always lower than 4.5," he said. "The crucial question for policy now centres on how Europe resolves itself."

More to cuts to come?

RBC Capital Markets expects the RBA to cut again in early 2012 as credit conditions worsen further.

RBC's economist Michael Turner said the RBA is clearly concerned about Europe and its impact on trade and Asian growth for the local economy.

"The RBA was also worried about the European impact on households and confidence," he said.

Mr Turner said the worsening credit conditions means the RBA can foresee a situation in which the banks don't pass along the full interest rate cuts in order to protect their margins.

Still, with record annual profits, the big four commercial banks risk public anger is they don't pass on the full rate reduction - as NAB found last month when it trimmed its lending rates by only 20 basis points rather than the entire 25 basis-point cut.

Tough economy

The RBA noted that while the previous rate cut had reduced credit costs, conditions remained difficult for many.

"The reduction in the cash rate as a result of the Board's previous decision flowed through to lending rates, which are now around their average level of the past 15 years," said RBA Governor Glenn Stevens in a statement.

"Overall, the Board concluded, on the basis of all the available information, that the inflation outlook afforded scope for a modest reduction in the cash rate," Mr Stevens said.

Indeed, the worsening conditions outside Australia have given the RBA room to cut rates as some of the inflationary risks have eased, the RBA said.

"Financial markets have experienced considerable turbulence, and financing conditions have become much more difficult, especially in Europe," Mr Stevens said. "This, together with precautionary behaviour by firms and households, means that the likelihood of a further material slowing in global growth has increased."

"Commodity prices have reflected this, declining further over recent months and taking pressure off CPI inflation rates," he said.

Split view

Economists had been split almost evenly between those forecasting a rate cut or a rate pause. Financial markets, though, had tipped the central bank would again cut rates as the global economic outlook dims.

The Reserve Bank board is not due to meet again to set interest rates until February 7 next year.

JPMorgan, an investment bank, predicts the RBA will resume its rate cuts in February, with another in March before pausing.

"It seems like it's all about Europe," said economist Ben Jarman. "If you're looking at domestic economy alone in a vacuum you wouldn't really see any need to ease policy but this month, as with last, it's about risk management."

Mr Jarman said an emergency rate cut during the holidays is unlikely especially as the RBA didn't make emergency rate cuts during 2008-9 when the financial crisis first hit.

Interest rate futures - one gauge of how investors view what's coming on the rates front - are tipping the RBA's cash rate will drop to 3 per cent by June. That view implies rate cuts at each of the RBA's first five rate meetings in 2012 - assuming each move is 25 basis points. And it would mean the cash rate would be back to its nadir during global financial crisis of 2008-09.

Interest rate cuts are very, very bearish. Batten down the hatches as the crash is gathering pace. Full blown panic will set in within months, maybe even weeks. Good to know that the government is well aware of the situation as they grapple with gay marriage and the carbon tax...sheesh!!

Commenter

Brisbane Bear

Location

Brisbane

Date and time

December 06, 2011, 10:37AM

RBA deliver.Mortgage holders is given a small relief.Retailers should also welcome the cut.There is a Santa after all.

Commenter

Outstanding

Date and time

December 06, 2011, 10:37AM

Well done RBA. More fuel for the bubble. And this is going to save retailers!!!

Commenter

WD

Location

Rio

Date and time

December 06, 2011, 10:38AM

Of course it is NOT a good Xmas present for those who rely on interest payments for their retirement income.

Commenter

steven

Date and time

December 06, 2011, 10:39AM

What a great day! The property market is coming back.

Commenter

Allan

Location

Prahran

Date and time

December 06, 2011, 10:40AM

It's a race to the bottom, Australia is following the rest of the world to the economic wilderness.

Commenter

Cat

Date and time

December 06, 2011, 10:40AM

Like all central banks around the world, the RBA thinks that encouraging debt is the way an economy grows. It's only a matter of time before this fallacy is exposed and our China dependent economy withers.

Commenter

Free to choose

Location

Sydney

Date and time

December 06, 2011, 10:40AM

once again supporting those who borrow, spend what they dont have and leech off the economy.

i save most of my $, and now i get less and less interest back. I used to get $300 a month, now i get $250 interest.

On the flipside, dropping interest rates means a failing economy, and is pushing house prices lower :)